Wells Fargo & Co (NYSE:WFC) still finds itself unable to stay out of the headlines over 18 months after WFC came under investigation over phony accounts. Just this year, news of more sanctions and investigations have further undermined the company’s once stellar reputation. WFC stock appears reasonably-priced by many measures. However, in an industry where reputation means everything, WFC stock should be avoided unless and until the company can regain its standing.
WFC Stock Faces Continued Controversy
Once revered as one of the nation’s best large banks, Wells Fargo’s reputation took a turn for the worse when its phony account scandal came to light in September 2016. The company fired 5,300 employees for opening a reported 3.5 million fake accounts. The company agreed to pay $185 million in fines.
In early February, the Federal Reserve placed sanctions on the company for failing to impose risk management controls. Also, the government revealed this month that the FBI along with the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) is investigating the wealth management division of Wells Fargo.
Large companies tend to recover when one scandal such as this occurs. In most cases I see, I encourage investors to treat them as a buying opportunity.
Warren Buffett Continues to Hold WFC Stock
The recurrence of these scandals shows a disturbing pattern. Despite this, WFC stock remains the largest holding in the portfolio of Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B). Mr. Buffett assures investors that WFC is working to clean up its reputation. Recent revelations of sanctions and investigations indicate otherwise.
As a result of this continued support, the scandal did not offer much of a stock price discount in the end. The WFC stock price stands close to its pre-scandal levels.
As of its last filing, Berkshire Hathaway still holds over 458 million shares of Wells Fargo stock, about 9.3% of the compnay’s total holdings. This represents only a modest decrease in the company.
In 2009, Warren Buffett said that if he were to put all of his holdings into one stock, he would choose Wells Fargo. An interesting statement to make, since at the time banks had been recovering from a financial crisis that nearly wiped them out. He has declined to directly repeat this statement, but he has remained in the stock.
Berkshire May Continue to Hold WFC Stock Out of Necessity
Perhaps Mr. Buffett has simply stuck to the fundamentals, which admittedly appear rather appealing for WFC.
The stock currently trades at a price-to-earnings (PE) ratio of around 12.5. Peers such as Bank of America Corp (NYSE:BAC), Citigroup Inc (NYSE:C), and JPMorgan Chase & Co. (NYSE:JPM) all trade at higher multiples. Dividends have generally risen on an annual basis since it emerged from the depths of the financial crisis in 2010. The dividend yield stands at over 3% today. Analysts also expect double-digit profit growth over the next three fiscal years. In most cases, numbers such as these serve as a buy signal.
Another explanation could involve the dangers of unwinding such a large stock position. Finding enough buyers for 458 million shares when the average volume stands at around 22.5 million shares per day remains a difficult task. Moreover, if word gets around that Warren Buffett has lost confidence in the company, investors could dump the stock en masse before Buffett could unload his own shares. This could send the WFC stock price to very low levels and cause great harm to the valuation of Berkshire Hathaway.
Average investors face no such pressure, and peers such as BAC and JPM will see higher levels of profit growth. If I were to invest in a large bank, I would look to one of those. And even if I wanted a stake in WFC stock, I would follow my colleague Will Ashworth’s advice and look to the Vanguard Financials ETF (NYSEARCA:VFH) or Berkshire Hathaway Class B shares.
The Bottom Line on WFC Stock
The repeated attacks on the company’s reputation make WFC stock one to avoid.
Since news of the phony account scandal came to light in 2016, Wells Fargo has found itself facing repeated sanctions and ethics-related inquiries into its business practices. Its most famous investor, Warren Buffett, has stuck with WFC amid the turmoil. However, Mr. Buffett may have no choice but to stick with WFC. Selling his massive position in WFC stock could create greater problems for his company than sticking with it.
Average investors face no such issue. Moreover, the repeated rounds of attacks on its stature create too much risk despite a low valuation. Given the questions surrounding its stature, I would discourage any direct position in WFC stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.